Shift in Fed policy rattles markets anew

Jun. 19, 2013
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Fed Chairman Ben Bernanke speaks during a press conference following a meeting of the Federal Open Market Committee on Wednesday at the Federal Reserve Board Building in Washington. / Mandel Ngan, AFP/Getty Images

by Adam Shell, USA TODAY

by Adam Shell, USA TODAY

In the latest sign that the road to a more normalized Federal Reserve monetary policy will be bumpy, stocks and bonds sold off Wednesday after the Fed's chief said it might start dialing down its bond-buying program later this year if the economy continues to improve. That unconventional policy, which has pushed borrowing rates lower in an effort to revive the economy, has been a main driver of the stock market rally since 2008.

Fed Chairman Ben Bernanke didn't provide a specific date as to when the Fed would start the so-called tapering of its $85 billion monthly purchases of mortgage-backed bonds and long-term U.S. Treasuries. But he did stress that any policy shift would depend on the strength or weakness of incoming economic data. That level of extra detail provided some extra clarity that investors have craved since the Fed's message got muddled last month amid conflicting messages.

But Bernanke also kept investors guessing. And worried that even though the Fed plans to just take its foot off the gas pedal, and not hit the brakes, it still equates to less Fed support and potentially a slowdown in growth, says Sam Stovall, chief equity strategist at S&P Capital IQ.

The Dow Jones industrial average fell 206 points, or 1.4%, to 15,112. Similarly, spooked by the prospect of a strengthening economy and the mere thought of less Fed bond purchases later this year, investors dumped U.S. Treasuries, driving up the yield from 2.18% to 2.35%, its highest level in 15 months.

The Dow's wild day marked the seventh session in a row in which it has closed up or down more than 100 points, its longest such streak since a nine-day run ending in October 2011.

Stock investors reacted to the fact that, while the Fed didn't start cutting back on its bond purchases Wednesday, it is on track to do so at some point. Their concerns are based partly on the fact that the stock market fell 15% and 23%, respectively, after the Fed ended its first two rounds of bond-buying, according to Citigroup.

"Policy normalization is coming," said Don Rissmiller, a strategist at Strategas Research Partners.

"We should be embracing the cessation of (the Fed's bond-buying program)," he said. "It is signaling that things are getting better."

Just because the Fed is considering the start of a shift from loose monetary policy to tighter policy is not a reason for long-term investors to "panic," says Kevin Pleines, an analyst at Birinyi Associates. The start of a less-easy Fed policy does not "necessarily coincide with a market peak or beginning of a recession" or a bear market.